but it’s on sale: how not to save yourself broke

Getting a bargain is a great feeling, isn’t it? In fact, I know some people who flat out refuse to buy anything at retail price. (And that’s not a bad goal, as far as it goes.) But there’s a danger — I think the cartoon says it better than I ever could:

Madison Avenue knows how we think, doesn’t it? We’re so wrapped up in how much we’re saving, we forget how much we’re spending in the first place. And it’s not just retail: Discover  is fond of sending offers for e.g. $500 cash back if you spend $3000 on their card every month for six months. American Express Blue Cash used to have a little gauge on their site that would show you how close you were — and how much more you would need to spend! — in order to make your cash-back goal.

The worst part: sometimes we do it to ourselves with almost no encouragement. For example, we hate to pay taxes — so we hold on to risky stock from our employer until it becomes a qualifying disposition, or we refuse to sell a well-performing stock for fear of capital gains (or alternately sell a temporarily underperforming one to lock in capital losses!). Now, sometimes this is the wise choice…but all too often, we make the decision in favor of “less tax” without giving the matter enough thought.

Of course, it’s not that humans are stupid — it’s that cognitive bias can often turn us into our own worst enemy. So what’s a poor, irrational human to do? To start:

  • First and foremost: stick to your budget in the face of sales. The envelope method makes this ridiculously easy — when you see a sale at Nordstrom’s or Fry’s, look in your envelope. If you have the money, great! Now you really can buy a little extra with the money you’re saving! If not, well, there will be other sales on other days. Either way, you can rest easy in the knowledge that you’re not saving yourself broke.
  • Think about money in absolute terms. Don’t think about how much you’re saving — think about how much you’re spending. When looking at a tax decision, treat the money you save in taxes as equal in importance to e.g. the money you make by selling that stock.
  • If you like bargain hunting, save up for seasonal sales. Lifehacker has a guide on when to buy anything — check it out!
  • Learn to negotiate — it’s like creating your own, personal “sale” on the spot!
Got any thoughts on sales? Drop a comment below!
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a paradoxical key to money happiness

In this week’s final session of my summer workshop series, we took the 50,000 foot view and asked ourselves the big questions — what is money? What is value? Where is God in all of this? We even came up with a few answers, one of which is this: paradoxically, one of the best things you can do with your money is this: give it away. 

As it happens, there’s scientific backing for this one. Some oft-quoted research by Elizabeth Dunn and others at the University of British Columbia shows that giving money away increases one’s (self-rated) happiness level, while spending it on yourself generally doesn’t, or perhaps at least not for long enough to be measurable. Yes, Virginia, money can buy happiness. But why? Well, there are a few thoughts on that one.

Relationships, not material goods, are what make people truly happy. You might have all the stuff (or experiences) that money can buy, but with no one to share it with, how happy is that going to really make you? The scientists hypothesized that in giving money away, you’re spending money on relationships, which create a more long-lasting happiness.

Conversely, not sharing your money can be stressful. Another study by these scientists showed increased levels of reported shame (and measured stress hormone) in participants who did not share their money when given the opportunity. It seems that we’re physically hardwired to share, and when we let our fear or greed override that impulse, we suffer for it.

Finally, it’s about freedom. As we discussed in the workshop, all too often our money ends up controlling us, rather than the other way around. We don’t want to give our money away, though many of us can’t even articulate the deep, nameless fear that drives us. When we do share, however, we are breaking free of that fear and showing our willingness to rely more on each other.

And is so often the case, breaking free of fear — stepping out in faith — gives us a joy and peace that cannot be matched by anything (else) money can buy.

ooma, or how to stop paying for your landline phone

Like arcades and paper books, landline phones are becoming an outdated artifact of the 20th century; many families have opted to cut their landline service entirely, in favor of their cell phones. For those of us that, for whatever reason, refuse to give it up, there’s another option besides suffering the $30-and-up bill that our telecom provider socks us with: Ooma.

What exactly is Ooma? Ooma is a VOIP service, one that provides you the equivalent of landline service, but through your internet connection. It does this through a sleek black box that is placed between your modem and your router; plug your home phone into this box, and voila! Dial tone.

How much does it cost? The box: $200. The ongoing service: whatever your local/government taxes are, say around $3/month. You can also get Ooma Premier, which gets you some nifty features for $10/month.

Can I keep my current home phone number? Yes, for an additional $40 you can port your number to the Ooma service.

How well does it work? Well, obviously it’s not going to work well with anything slower than a broadband internet connection. If you put it between your modem and your router (or between your modem and your PC, if you don’t have a router), it works great — it uses “QoS” (“quality of service”) to make sure that your phone gets the bandwidth it needs. However, if for whatever reason you can’t put your Ooma upstream of your router, you are probably going to experience a loss of quality if you try to make a phone call while e.g. watching Netflix Streaming; you may hear the other person just fine, but they’ll probably hear your voice cutting in and out occasionally.

What gotchas or fine print should I know about? There are a few, some of which I’ve already touched on:

  • The big one I’ve seen complaints about is that there is an ongoing charge, if a small one: you still have to pay your government taxes, and a lot of people who sign up for Ooma aren’t aware of that (though it’s clearly spelled out in several places).
  • As I mentioned above, you may be sacrificing quality depending on your network speed and architecture. Ooma has a 30-day return policy, though, giving you plenty of time to evaluate it.
  • True landlines are traditionally more reliable than internet connections, though the gap between them is very small these days.
  • You will no longer be able to use your home phone jacks; you must plug your phone directly into your Ooma. (Please don’t try plugging your Ooma into your home jack; the fifty volts could fry it.) If you need phones throughout your house, you can easily purchase a multiple-handset cordless phone system like this one, if you haven’t already.

The Financial Geekery household currently uses an Ooma, so if you have any other questions, feel free to fire away in the comments!

Edit: Really weird — between writing this post and publishing it, I got an e-mail from Ooma about a special referral deal which lowers the price from $200 to $150. Now, as I’ve said before, I don’t accept referral money, but I don’t want you to miss out on a good deal, either, so: if you’re interested, send me an e-mail, and I’ll send you the code and my referral bonus (a $20 amazon.com gift card). The deal expires 7/31. Happy Ooma-ing!

what to do with those annoying prepaid credit cards

If you’re anything like me, you pine for the days when rebates and gifts came in the form of simple checks. Nowadays, however, it’s all the rage to give out prepaid Visas or Mastercards. Which is all well and good, except that most vendors only accept one credit card at a time, not allowing you to split your payment across multiple cards. So what to do? The answer: amazon.com gift cards to the rescue, in three easy steps!

  1. Purchase an amazon gift card in the amount of your prepaid card, using the prepaid card. Edit: You may have to register the card online before the transaction will go through, e.g. for “Vanilla Visa” cards. It’s generally as simple as entering a ZIP code.
  2. Send the gift card to your e-mail address.
  3. Apply the card’s code to your amazon.com account.

It’s completely free, and from that point on, the amount of your prepaid card can be applied against any purchase you make from amazon — from which you can buy just about anything (and the shipping is free).

Problem solved!

spend more, not less

Wait, what?

It’s the holiday season, and I’m a personal finance guy — shouldn’t I be harping on The Reason For The Season, and It’s Not How Much You Spend That Matters, and all that? Is it time to chuck all that stuff and go back to good ol’ fashioned consumerism, and forget this whole frugality business?

Not exactly. But every now and then, it’s good to take a step back and remind ourselves what being fiscally responsible is all about.

The end goal of personal finance isn’t to spend as little as humanly possible. Heck, that’s not even the beginning. But frugality has made a comeback, and so we’re constantly being deluged with “10 ways to save on clothes” and “5 ways to save on travel expenses”. This is handy, but it’s not an end unto itself. The goal is to spend less on some things so you can spend more on other things.

That is, after all, the point of budgeting; to figure out what your values are and assign a numerical value to them. You’re going to value some things more than others — why not spend more on them? After a talk I gave earlier this year in which I mentioned the value curve, I was approached afterwards by a woman who said that she had decided to spend more on travel, not less. She told me this with a look of chagrin, as if expecting disapproval; on the contrary, I thought this was fantastic! To be mindful enough, awake enough, to be able to make your own decisions about what you value and align your money accordingly — this is what personal finance is all about!

A handful of assorted morsels to chew over on this topic:

Consider spending your money where you spend your time. I’m a big fan of Lifehacker, and they recently posted an excellent article on this subject. I spend a lot of time on my computer, and when I do have free time, I love to play video games — so I conscientiously put money into my PC, making it as fast and reliable as possible. You spend all day in your clothes — why not make them comfortable? And if your mattress is messing up your sleep patterns, for the sake of everything that’s holy (not to mention your sanity, productivity, health, and general well-being), get a better one!

If you’re looking for education or self-improvement, don’t underestimate the value of a tutor or coach. Full disclosure: that includes a personal finance coach, of course, but Get Rich Slowly will back me up on this one. Money for an expert who can hold you accountable is extremely well-spent, especially if you find that motivation is an issue (and it so often is!). And the really good coaches will not only teach and motivate you, but teach you how to learn and motivate yourself!

Don’t just put money into a generic “savings account”. This is a specific example of “give every dollar a job”, but it’s an important enough to single out. When you have a pile of money that’s just sitting there, waiting for you to use, you’re going to use it sooner rather than later. This isn’t inherently a bad thing, except the thing you buy sooner may not be as valuable to you as the thing you would have bought later. Sure, remodeling is great — you spend a lot of time in your home, after all — but would that money be better spent on a mini-retirement, or a new car, or even just specifically set aside as emergency savings in case you experience, ahem, cash flow difficulties? Maybe it would be — but having different savings accounts for different goals forces you to ask yourself the question, and gives you an extra barrier to pulling money out at random (“I was really looking forward to that walking tour of England…maybe I can put this other thing off for a year”).

Be generous. Give your money away (mindfully, not willy-nilly — Christmas debt doesn’t do anyone any favors, the gospel of consumerism notwithstanding). But not just for the holidays. Tip 20%. Give money to your church and organizations you care about. Spend money on things that don’t benefit you directly. The unfortunate part of the recent rise in frugality is that it’s based on fear, and generosity is the best way to actively combat that. I often come back to idea that you should own your money, not the other way around, and giving it away is a great way to show it who’s boss.

Happy spending!

the power of discretionary spending

 I have to admit, I had some trouble with the title to this post. “The power of discretionary spending?” What does that even mean? Well, read on, and you’ll see. (And if you come up with a better idea for a title, feel free to leave it in the comments.)

The idea is relatively simple, almost to the point of “well, duh”: the more discretionary spending and the less mandatory spending you have in your budget, the better off you are. That is, the less money you must spend per month relative to your income, the brighter your financial outlook will be. It’s the difference between paying monthly bills and contributing towards monthly savings goals. Again, this might sound painfully obvious to the most casual observer, but I argue that while this may be so, we don’t actually prioritize it as much as we should.

What do I mean? Let me give you some examples.

You can better handle sudden emergencies. Say your car breaks down, or you have to make a trip to the emergency room, or you have to take a short-notice plane trip. The more discretionary spending you have, the better able you are to temporarily shift your spending and saving to handle this new thing. For example, you can put a little less money this month towards saving for your next car in order to repair your current one. If you’re still paying off your current car, however, you don’t have that option.

Your budget can change with your priorities. Our budget reflects our priorities; how much we spend on food, clothing, retirement, etc., reflects how much we value these things. (Or at least, it should.) And  these priorities change over time — especially when starting a family! However, if you’re stuck paying mandatory bills, you don’t have the flexibility to shift your budget more towards your new priorities, like saving for a house or for college.

You can take advantage of opportunities. If you’re saving up for a new PC and it suddenly goes on sale, you can shift your budget around to take advantage of the opportunity. Oftentimes, though, people use sales as an excuse to whip out the credit card, and the interest cancels out any discount they may have gotten!

You can lower your income. In America, this is pretty much a foreign concept. Why on earth would you want to lower your income? Well, don’t tell Capitalism, but there’s more to life than spending. Having even the option of lowering your income means you can work part-time if you want more free time, or take a lower-paying job if your current one is giving you heartburn, or if you find a new one that fits your life’s passion. But if you don’t have the discretionary spending, you’re stuck.

“OK, OK,” you say. “I get the picture. But it’s not like there’s anything I can do about it.” Actually, that’s not true, if you make it a priority. Here are two very specific things you can do.

Avoid debt. When deciding whether to put something on your credit card or whether to take out a loan, consider the fact that you’re lowering your discretionary spending by doing so. If you take out a loan, you have to pay it back; it doesn’t matter if your priorities change, or your car gets totaled, or housing prices crater — you’re taking on an obligation that is very, very hard to get rid of. If you save up for the future, rather than taking on debt and paying for the past, it will go a long way towards maximizing your discretionary spending. Sometimes debt is still the right choice — but think carefully before pulling the trigger. (As a corollary: parents, start saving for your children’s college education the minute you find out your pregnant, and you’ll do wonders for their future finances. Don’t know if you’ve noticed, but student loans are eating graduates alive these days.)

Avoid investment vehicles that require mandatory spending. While the idea of “forcing yourself to save” by investing in something like a whole life or VUL insurance policy may sound appealing on the surface, the problem is that they impose heavy penalties if you change your mind. (CD’s have a similar problem, though they are of course a one-time expenditure rather than a monthly one.) I’ll go into more detail on insurance policies that also act as investments in another post, but for now simply consider the fact that they reduce your discretionary spending, which can be a huge disadvantage if you find down the line that you’re going into credit card debt in order to avoid having your VUL collapse! If you want to force yourself to save, just set up an automatic withdrawal into the appropriate account. It’s just as effective, it’s less complicated, and it lets you change your mind down the line!

So: the next time you’re making a financial decision, don’t just look at the numbers. Think about the effect it will have on your discretionary spending. Your future self will thank you!

the value curve

Last night, among other things, we talked about a fun little concept that’s pretty familiar to financial geeks: the Value Curve.

 

The idea is pretty straightforward. Imagine something you can spend money on, like buying clothes. You would start off on the far left part of the curve: you’ve spent no money, and gotten no value. (Oh, and you’re naked.) Moving up the curve, you could buy your clothes at Goodwill; not a lot of money, but a heck of a lot of value over being naked! But maybe the clothes you find don’t fit very well; in that case, you could move up a bit, go to a decent department store and get stuff that fits well. It costs more, but you get more value (unless you’re really good at shopping Goodwill!)

Then the curve starts flattening out. Those $200 designer jeans are doubtless better than a $20 pair from Old Navy…but you had to pay ten times the money to get it. And then you go way over to the far end, where you start seeing million-dollar diamond underwear from Victoria’s Secret. (No, I’m not making that up.) Then you start actually getting less value, ’cause it’s uncomfortable and you start having trouble sleeping at night, wondering if someone’s going to steal your undies!

Jokes aside, it’s easier to get to that far end than you might think. The nation’s economy revolves around getting us to buy Stuff, so it’s a natural consequence that, barring effort on our part, our lives will soon become filled with clutter. It distracts us, takes up room, not just in our houses but in our minds.

For some people, climbing this curve becomes likes an addiction; they have to spend more and more to achieve the same “high”. This is closely related (but perhaps not identical) to “lifestyle inflation“. In either case, you find yourself in a very peculiar place: you’re making a ton of money, and yet you still feel like you’re broke.

So the object of the game seems pretty obvious — we want to be on the left side of the curve, in that shaded part. The absolute ideal is right at the knee, right when it starts leveling off. (A friend of mine once got so specific as to tell me that you get there on $75,000 a year household income.) You don’t have to go all geeky and call it “the knee of the Value Curve”, though. You can just call it Enough, or Balance. The point is this: be aware that it exists. Strive for it. When you go to buy something, think about how much value it will get you. Better yet, think about it when you plan your budget, and create a system to help you carry out that plan.

You just might find yourself with a new problem: what to do with all the extra money!